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Factors Likely to Decide Twitter's (TWTR) Fate in Q3 Earnings

Twitter Inc.TWTR is scheduled to report third-quarter 2017 results on Oct. 26 before the opening bell.

Sluggish user growth coupled with declining revenues continues to dampen investor interest in the stock. Though focus on video streaming is the right way forward, it hasn’t yet yielded the desired results for this micro blogging site so far.

User Growth Stutters

Lackluster user growth remains the primary concern for investors. In the last reported quarter, user base was stagnant at 328 million monthly average users (MAUs) sequentially but registered a 5% jump year over year. Though daily average user growth was up 12% year over year, it decelerated from the prior-quarter’s growth of 14%.

With such a small user base, Twitter falls way behind other social media services like Facebook Inc FB, which has over 2 billion users. The complex nature of the service has often been considered a major hindrance to user growth. Also, Twitter’s user growth is marred by the widespread abuse that has plagued its platform for awhile now.

For the third quarter, the Zacks Consensus Estimate for MAUs stands at 331 million, representing an increase of just 4.4% from the year-ago quarter’s actual figure of 317 million.

Initiatives Unlikely to Boost Growth in Q3

Twitter has been taking various measures to combat all odds including curbing the widespread bullying on its platform. To help users to express more, the company has started testing the 280 character limit for tweets, doubling from the signature 140 limit since last month.

, Twitter said though “brevity” has been the essence of Twitter, the extension of character limit will ease the “cramming” of thoughts into a single tweet. Citing its own findings, Twitter claimed that when people have more room to tweet, tweeting increased.

Twitter earlier had done away with calculating media attachments and @names in the count, enabling users to express more in tweets and revamped the app to improve user experience.

However, some changes have not been welcomed by hard core Twitter users. We believe changing features, which are unique to Twitter, might estrange existing users, which isn’t an affordable proposition in face of decelerating user growth.

We don’t expect these initiatives to have much incremental benefit for Twitter in the soon-to-be reported quarter. Year to date, shares have underperformed the broader market. Twitter share are up 7.4% compared with 25.3% rally seen in the Zacks industry.

Revenues Disappoint

Revenues fell 4.7% year over year in the last reported quarter due to an 8% drop in ad revenues to $489 million. Though ad engagements continue to grow, it is the cost per ad engagement metric that remains an area of concern. It was down 53% in the second quarter of 2017, given the shift to auto-play video, which has a lower cost per view compared to click-to-play.

Brand marketing is one of the primary contributors to the company’s revenues. We have always maintained that Twitter’s ability to attract advertising revenues amid significant competition from the likes of Facebook, Snap Inc SNAP and Alphabet Inc GOOGL will be a key factor determining its growth, considering the fact that investment in product development needs to continue.

To boost ad revenues as well as user engagement, Twitter has been hawk eyed on boosting video content. It has signed several high profile streaming deals in the past one year. At its last earnings conference, Twitter had called video its fastest growing ad format to offset declines in traditional Promoted Tweet and direct response ad formats. These are yet to yield the desired results as Twitter’s ad revenue growth remains sluggish.

The Zacks Consensus Estimate for third quarter revenues is pegged at $590 million while ad revenues are expected to be around $497 million. This represents a respective decline of 4.2% and 8.8% from the actual figures reported in the third quarter of 2016.

Stringent Cost Control Impressive but Not Enough

Twitter’s stringent cost control measures are impressive. We expect the cost savings to positively impact EBITDA in the soon-to-be reported quarter.

For the third quarter, adjusted EBITDA is expected to be in the range of $130 million–$150 million while EBITDA margin is likely to be in the band of 25%–26%. Twitter’s Data licensing business is witnessing sturdy growth on the back of a number of enterprise deals.

However, the analysts covering the stock expect the declining revenues to weigh on the bottom line. The Zacks Consensus Estimate for third-quarter 2017 earnings per share is 6 cents compared with 13 cents reported in the third quarter of 2016.

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